IDP Education: Buy the dip or steer clear?

Immigration is a red-hot issue in Australia, with the latest data showing another 550,000 new arrivals in the last financial year. It has been a double-edged sword for the local economy, helping with growth and labour shortages, but also drawing criticism for its role in higher house prices and cost of living pressures.

These figures have been seized on by Opposition Leader Peter Dutton, which has in turn spurred the Australian Government to announce tougher visa rules for foreign students.

IDP Education (ASX: IEL)

One Australian company that has been a bellwether of Australia’s contentious immigration program is IDP Education. In addition to the regulatory changes in Australia, tighter international student regulations in other key markets of the UK and Canada have also weighed on the stock, which is down 22% so far in 2024.

The firm started as an English-language testing business in 1996, when it was half-owned by the country’s universities and employment platform Seek (ASX: SEK) until 2015, when it was listed on the ASX.

The universities sold a 15% stake for $1.14 billion in 2021. The company now provides international student placement services with major universities.

Now well-known to many Australian investors, IDP Education has grown its market cap beyond $4 billion and squeaks into the ASX 200.

Visit Market Index to find out more about IDP Education

What do fund managers think?

A quick scan of the Livewire website turns up a slew of mentions of IDP Education. In more recent times, it has attracted polarising views, with several fund managers cooling on the stock in the wake of the tighter student immigration rules.

One of the most recent mentions came from Ellerston Capital, which has viewed the selloff of IDP’s stock as a buying opportunity.

Portfolio Manager Chris Kourtis was quoted by the Australian Financial Review as saying the government’s restrictions on foreign student numbers created “an attractive entry point” for investors.

“The uncertainty associated with the near-term earnings risk in major markets like Canada and the UK have clearly weighed heavily on the stock and analysts have rebased their earnings lower,” he said.

“A UK election also clouds the picture,” he said. “[IDP] should emerge stronger when global migration and education reverts in the medium term.”

"Political dogfight"

At the end of May, ECP Asset Management’s Sam Byrnes also expressed his belief that management will rise above the current challenges.

“Despite the ‘political dogfight on immigration’ that will hurt the business in the short-term,” he believes IDP’s business model is increasingly resilient to changes in any one destination.

“The crackdown to improve the quality of the industry is likely to substantially reduce competition for IDP and International Student demand is not going away. As students look to other destinations to study, IDP is best positioned to serve those customers,” Byrnes said.

Schroders "disentangling" complexity

Schroders’ Martin Conlon has also expressed a view on the company, his team having taken the time to “disentangle” the complex external operating environment from the business itself.

Surveying the politically charged environment in which IEL’s core business of International English-language Testing sits, Schroders arrives at the conclusion that “none of this really matters.”

“IDP are adept at delivering better quality students than peers, universities will always have a voracious appetite for more students, the supply of students seeking higher living standards is unlikely to dry up any time soon, and governments across Australia, Canada, US and the UK are unlikely to change course materially,” he wrote.

Datt: Too many question marks

On the other side of the ledger, the business case of IDP Education simply doesn’t stack up for Datt Capital’s Emanuel Datt.

In mid-May, Emanuel Datt told Buy Hold Sell viewers IEL was a sell.

“It's basically trading on too hefty a valuation and it's priced for perfection. We've seen consistent falls over the past couple of years from its peak and it's down about 58% or 60% from its peak,” Datt said.

“Ultimately, the economics of the business are heavily dependent on immigration, ultimately, and Australia's continuing attractiveness as a destination for international students.

“I think there've been some question marks over what the future policies may be from the federal government around that, I guess shaking investors. For us, it's not a risk we want to take, so we'll call it a sell.”

A high-quality stock under pressure

In the same interview, OC Funds Management’s Aaron Yeoh was more sanguine on the company.

“IDP is a hold from our perspective. We think it's a very high-quality business, but I do agree, in the near term, there is a lot of pressure from a regulatory perspective,” Yeoh said.

“The Australian government has a target to halve net migration in the next 12 months. That's still outpacing their targets at the moment, so we're just a little bit wary about the potential risks in the near term. So good quality business, but earnings probably a little bit shaky near term. It's a hold.”

An altered business landscape

Even before the Australian Government’s announcement, things were getting too complicated for Medallion Financial’s Michael Wayne.

Revealing in March he had sold out of the company, Wayne said: “The landscape for the business has altered somewhat over the last 6-12 months. There’s been regulatory changes in the UK and Canada, for instance. There are also some ongoing issues in India with their English language testing systems.”

What do you think?

Do you hold IDP Education currently - or have you owned it previously? Let us know your thoughts in the comments section below.